Page 67 - untitled

3

SECURITIZATION AND DERIVATIVES

CONTENTS
Fannie Mae and Freddie Mac: “The whole army of lobbyists”.............................
Structured finance: “It wasn’t reducing the risk”...................................................
The growth of derivatives: “By far the most significant event
in finance during the past decade”...................................................................

FANNIE MAE AND FREDDIE MAC:
“THE WHOLE ARMY OF LOBBYISTS”

The crisis in the thrift industry created an opening for Fannie Mae and Freddie Mac,
the two massive government-sponsored enterprises (GSEs) created by Congress to
support the mortgage market.
Fannie Mae (officially, the Federal National Mortgage Association) was chartered
by the Reconstruction Finance Corporation during the Great Depression in  to
buy mortgages insured by the Federal Housing Administration (FHA). The new gov-
ernment agency was authorized to purchase mortgages that adhered to the FHA’s un-
derwriting standards, thereby virtually guaranteeing the supply of mortgage credit
that banks and thrifts could extend to homebuyers. Fannie Mae either held the mort-
gages in its portfolio or, less often, resold them to thrifts, insurance companies, or
other investors. After World War II, Fannie Mae got authority to buy home loans
guaranteed by the Veterans Administration (VA) as well.
This system worked well, but it had a weakness: Fannie Mae bought mortgages by
borrowing. By , Fannie’s mortgage portfolio had grown to . billion and its
debt weighed on the federal government. To get Fannie’s debt off of the government’s

balance sheet, the Johnson administration and Congress reorganized it as a publicly
traded corporation and created a new government entity, Ginnie Mae (officially, the
Government National Mortgage Association) to take over Fannie’s subsidized mort-
gage programs and loan portfolio. Ginnie also began guaranteeing pools of FHA and
VA mortgages. The new Fannie still purchased federally insured mortgages, but it
was now a hybrid, a “government-sponsored enterprise.”
Two years later, in , the thrifts persuaded Congress to charter a second GSE,
Freddie Mac (officially, the Federal Home Loan Mortgage Corporation), to help the
